In the first installment we discussed three primary benefits that alternative investments can provide to a 'traditional' investment portfolio or as a stand-alone investment. Today, we'll conclude with two more, and by the end of this you should be asking yourself, "where do I go from here?"
Reason #4 - Transparency
Imagine how your financial adviser would look at you if you told him you want him to arrange a meeting with the chief decision-maker at one of the mutual funds that manage your money. Given the time of year, he might be expecting you to follow-up with "April Fools!" What if you were serious though?
The truth is that it is highly unlikely that you would ever be able to get a straight answer on the inner workings of a large mutual fund's investment strategy and would probably never get an opportunity to meet with the CEO or president. However, with many alternative investment managers, the chief decision makers are only a phone call or email away. These investment shops are typically small, tightly knit groups that have similar incentives to you, and therefore care about the details that are important to you. In fact, if one of our clients has a question or need, they can expect to hear a response within 24 hours, and many times within a few minutes.
What better peace of mind is there than knowing that you have an investment manager who has monetary incentives in line with yours, and that you can give a quick call or email if you have a question and want a clear answer?
Along these same lines, the ultimate in transparency occurs via separately managed accounts which are offered primarily by Commodity Trading advisers (CTA). Managed accounts offer the individual the ability to view trades on a daily basis and often watch their account in real-time.
Also, within a managed account program the individual keeps custody of his investment, eliminating a number of custodial and security issues.
Reason #5 - Absolute Performance
Let's get one thing straight, while transparency and diversification sound great, and are very important, in the end the thing that matters most to most people is return on investment.
For many folks, you're not reading this article or checking up on what's happening for fun. You doing it because you have to plan for the future and want to be able to retire while you're still young enough to enjoy it.
When looking through the performance numbers on ranking sites such as www.iasg.com, it is plain to see that there are programs and strategies available that can pull in returns that dwarf anything your stock broker is telling you.
Obviously, with the capability for large returns comes a heightened probability of large losses, but the key is to look for strategies that provide a good return at a reasonable cost. That cost being maximum drawdown. Max drawdown is the largest decrease in equity after a new high. Thus, a 50% drawdown means that the program lost half of its value at some point in its history.
The higher the max drawdown, the higher the probability of the worst case scenario, which is total loss. The bottom line is to find a program that gives you at least a one-to-one in terms of average annual return to max drawdown. For example, a program that has a max drawdown of 20% should be earning 15-20% per year to give you a reasonable risk/reward trade off.
To put things in perspective, the S&P 500 has a total return of just over 1% in the last 10 years with a maximum drawdown approaching 50%. This is not a good risk/reward. On the other hand, there are alternative investments out there that have returned 20% with drawdowns around 10%. What's more, a relatively small allocation (10-20%) to even a modestly performing managed futures product for instance, would have dramatically improved portfolio performance and lessoned the drawdown considerably.
If you're reading this article today and take nothing else away, please remember this - THINK FOR YOURSELF! Do not be afraid to go out and perform your own research on a particular investment. Do not be afraid to move your money or ask questions if you're not happy with the performance you are getting. The point of this article is not to disparage traditional assets. The point is to show that while utilizing only alternative investments may not be best for everyone, a mix of traditional and alternative investments can be an extremely powerful tool in making sure that your financial future is secure.
If you do choose to invest with a managed futures company, you will most likely be met with raised eyebrows from friends and family as most consider these "risky" because of something they heard from a distant relative or on TV.
However, this is also the reason that most individuals lose money in the markets, especially when you factor in inflation. In the end, you may choose to stick with traditional assets only for your portfolio, which is fine, but at least you will be able to say you're not missing the boat, but rather, just comfortable on the land.
Brandon Langley is the co-founder of Robinson-Langley Capital Management, LLC. Robinson-Langley Capital Management currently offers the RL Capital Managed Account Program which manages funds for individuals and institutions. You can find out more about RL Capital at www.rlcap.com. Langley can also be contacted via email at Brandon.Langley@rlcap.com.
